China to cut bank loans to local govts-regulator

A resident rides a bicycle past a branch of Industrial and Commercial Bank of China in Xiangfan, Hubei province October 29, 2009. Booming loan growth in the first half of the year helped boost quarterly profit at Industrial & Commercial Bank of China (ICBC) , the world's most valuable bank, but a slump in the third quarter and continued tight margins could squeeze results heading into 2010. Photo: REUTERS

China is cutting the size of outstanding bank loans to local government financing vehicles, Liu Mingkang, the head of China's bank regulatory body, was quoted as saying on Monday.

Liu, the chairman of China Banking Regulatory Commission (CBRC), was quoted by the China Securities Journal as saying that Chinese banks were ordered not to extend any new loans to these vehicles unless they were for affordable housing development.

Liu added that the full-year new loans in 2011 were expected to be 7.5 trillion yuan, based on a target of 16 percent growth in M2 money supply.

Chinese banks have extended a huge amount of loans, which some researchers have estimated at $10 trillion yuan, to local government finance vehicles since China started its massive economic stimulus package in late 2008.

Economists fret that many of the projects they are funding will never be profitable, saddling banks with bad loans.

Liu added that CBRC is also checking bank loans to property developers for risk control, but banks are still allowed to lend to property developers.